Hudson Valley Holding (HVB) is eager to reinvent itself seven months after being freed from a regulatory order. Fortunately, the Yonkers, N.Y., company has plenty of cash to pull off the transformation.
The key for the $2.9 billion-asset company, given its historic focus on commercial real estate, has been diversification. It launched an asset-based lending unit in November and in March created an equipment-lending arm.
Management is planning to expand its mortgage-banking operations by offering adjustable-rate and home-equity loans. And the company is in the early stages of a five-year, $4 million technology initiative designed to add mobile banking and cash management services.
The goal is to "win business away from some of the largest and most-sophisticated banks" while converting "excess cash into earning assets," Stephen Brown, Hudson Valley's president and chief executive, said during a conference call last week to discuss quarterly results.
Hudson Valley has a stockpile of cash it can use on fund its initiatives. Cash made up about a fifth of total assets at March 31. Analysts at Sandler O'Neill estimate that management is sitting on $475 million in excess cash. Its Tier 1 capital ratio was a robust 16.2% at the end of the first quarter.
The funding is relatively cheap because of a strong core deposit franchise that Mark Fitzgibbon, a Sandler analyst, calls one of the best in the banking industry. Core deposits made up about 97% of total deposits at March 31, and the company pays about 0.17% for its deposits.
This money provides plenty of "raw fuel" for organic growth, Fitzgibbon says. Acquisitions are unlikely; Hudson Valley has made only two acquisitions in its 40-year history.
Rather, management is focusing on pinching lending teams. Its equipment-finance group, called HBV Equipment Capital, was created after Hudson Valley lifted a group from Sterling Bancorp. The unit serves small- and middle-market business clients in metropolitan New York, making loans for up to $5 million.
Hudson Valley hopes it can replicate the quick start produced by its asset-based group. That team, hired from Wells Fargo, originated nearly $22 million in loans during the first quarter, Hudson Valley said last week in its earnings release.
The third part of Hudson Valley's growth plan involves residential loans, specifically adjustable-rate mortgages and home equity. Residential mortgages totaled $315 million at March 31, representing 19% of total loans. That compares to 13% a year earlier.
The added lending helped Hudson Valley return to the black during the first quarter. It earned $1.9 million even after absorbing a $1.1 million prepayment penalty for retiring Federal Home Loan Bank borrowings. The company lost $8.5 million a quarter earlier because of an accounting charge tied to a loss of client's in its asset-management unit.
Diversification also represents a shift for Hudson Valley, which had been the "poster child" for New York City commercial real estate lending since its founding in the early 1970s, Fitzgibbon says.
Management largely credits regulatory intervention for the strategic shift. The Office of the Comptroller of the Currency entered into a written agreement with Hudson Valley in 2012 that required the bank it to reduce its commercial real estate concentration and build better internal processes to manage risk tied to such loans.
The order forced Hudson Valley to diversify its skill set and change its focus, Brown told attendees at a conference hosted by Raymond James last year. (Brown was promoted to CEO in 2012 with a mandate from the company to diversify.)
The OCC's move was preemptive and designed to stay ahead of potential loan problems before they start, marking a slightly unusual decision for regulators, analysts say. Hudson Valley had not suffered high losses or reported serious credit problems in its commercial real estate book.
The order "forced Hudson valley to change their whole corporate strategy and their lending strategy," says Dan Marchon, an analyst with Raymond James. The company's concentration of commercial real estate loans has fallen to about 35% of total loans, compared to 44% in mid-2011, he says.
The order indirectly led Hudson Valley down path where it began to invest in itself. Management sold $474 million of commercial real estate loans after the OCC's intervention, adding to an already strong cash reserves.
Hudson Valley has also been able to transform how it approaches its credit operations. "We have... invested heavily in the health of our loan portfolio in recent years from pursuing loan workouts and selling loans to implementing sophisticated systems to improve underwriting and resolution processes," Brown said during last week's call.
Though pleased with the intent to diversify, analysts note that the company has not yet demonstrated that its new model is consistent successful. Hudson Valley has plenty of fuel for growth, but it also has to make key decisions to make about where to put future funds to use.
"The old strategy is gone, and now we've seen one quarter of new Hudson Valley model," Marchon says. "We hope to see some consistency in stringing together a few good quarters of strong earnings and organic growth."
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